Journal Article The New Form of the Bank of England Return: An Historic Change Get access R. D. Richards R. D. Richards London Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 43, Issue 2, February 1929, Pages 381–388, https://doi.org/10.2307/1882481 Published: 01 February 1929
The problem of depreciation has had various interpretations in the course of its evolution in accounting practice and accounting literature. It has been treated as a problem of financing the replacement of fixed assets; as a method of presenting properly such assets in the balance sheet, and as a problem of the allocation of costs in operating statements. The usual practice among current writers appears to be to recognize these different interpretations and to admit their inconsistency. Depreciation is discussed from the viewpoint of the balance sheet and from the viewpoint of the operating statement, frequently with the expressed or tacit assumption that those viewpoints are irreconcilable. It is proposed here to show that a proper treatment of the problem from one point of views entirely consistent with its proper treatment from other points of view that the problem is one problem consistent within itself regardless of relative emphasis placed upon its different aspects. Depreciation originally made its appearance in accounting in the form of an appropriation from net income or surplus as a provision against the time when fixed assets must be replaced. In this form it related to financial administration and not at all to the immediate control of operations. So used, depreciation was, therefore, a financial and not an operating account.
In this article the author contends that an accurate allowance for depreciation must take into account probable repair costs over the whole life of the assets the value of the asset is affected by both the amount and distribution of expected repair costs, and that, therefore, any accurate calculation of depreciation requires prediction of repair costs as well as prediction of the life of the asset and its scrap value. In order to make an investment in an asset profitable, depreciation must afford returns large enough to cover the replacement of the investment, a competitive net return upon the investment in the asset and repair costs necessary to maintain the efficiency of the asset. If it is known in advance that in some years an asset will not afford its usual income, allowance will be made for that fact in the determination of its present value. Since the value of the asset always is dependent upon expected incomes from it, the calculation of depreciation can likewise be based upon future expectations.
For years the system of setting up a budget at the beginning of the fiscal period has been urged upon business conceits, as of September 1929. For a long time the advantages of the budget have been explained to all those who showed the least interest in the subject. Business men were told that the budget system would render a great service to the business in the fact that budgeting requires planning ahead. They were also told that the budget is the best help in coordinating all the activities of the various departments and the budget can be used as a means for centralized executive control. But in spite of all these arguments in its favor, the budget has never appealed strongly to the business executive. After a few years of experimentation with it, they came to the conclusion that it was not worth the money and the effort spent on it. Budgeting, these businessmen claimed, was nothing but guesswork. In addition these business men claim that the budget is after all no help to management as an instrument of control. For everyone in the concern very likely knows that the budget was a compilation of guesses and therefore could not be used as a standard.